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Bookham, Avanex: The Merger Is On

The rumor that refused to go away finally becomes reality, as the two optical communication component vendors agree to merge.

Avanex and Bookham announced last night that they have reached a definitive agreement to merge, as they each strive for consistent profitability. The two companies will combine in an all-stock deal worth approximately $35.4 million.

Avanex shareholders will receive 5.426 shares of Bookham common stock for every share of Avanex common stock they own, and will end up owning 46.75 percent of the combined company. Based on the closing price of Bookham stock on 26 January 2009, this arrangement values Avanex at $2.17 per share — a considerable premium over its quoted price of $1.33 at the same time.

The companies expect the deal to close in three to five months, when they will combine under a new name that has yet to be decided. Bookham s president and CEO Alain Couder will retain the same roles at the new company.

Rumors of a tie-up between Avanex and Bookham have been circulating since late 2006, when it is thought that a deal nearly happened. The justification for the merger looks much better now, according to Couder.

“If we have done that [deal] several years ago it could have been quite expensive, but each company has done a great job to clean its own house and to end up very complementary," Couder told investors on the conference call last night.

Now the vendors say that the merger is important because it gives them critical scale. For many years the undisputed powerhouse of the telecoms components space was JDSU. But that started to change last year with mergers between Finisar and Optium, and between Opnext and Stratalight, which created companies of a similar size to JDSU.

“I think that by putting our two revenues together we can really start playing in the tier 1 camp," said Couder.

Extrapolated from the September 2008 quarter, the Avanex/Bookham combination would have annual revenues of $447 million, putting it in fourth position behind Opnext at $455 million, JDSU s telecoms division at $532 million and Finisar at $638 million.

With a GaAs fab in Switzerland and InP fab in the UK, Bookham primarily brings chip-level and components expertise for tunable products in particular.

Fabless Avanex brings to the table strength in subsystems such as optical amplifiers, wavelength management, and dispersion compensators. Since the divestment of its own III-V fab to form 3S Photonics the company has purchased its laser diodes.

Couder expects the combination to generate $20 million of total savings in the first quarter after closing, while costing less than $7 million for restructuring in the same period. Cost savings will come from sales side and supply chain synergies. For instance, Bookham is a leader in GaAs pump lasers, which are a key component of the optical amplifiers that make up a significant part of Avanex s portfolio.

Another attraction of the deal is the ability to focus R&D dollars rather than spreading them more thinly by pursuing the same opportunities as stand-alone companies.

Note, however, that Bookham s numbers don t include the impact of Nortel s bankruptcy. Bookham, which purchased Nortel s in-house components division back in 2003, has historically had very strong ties with the Canadian vendor, and although it has reduced its dependency on Nortel as a customer, Nortel still accounted for 11 per cent of Bookham s revenues in the second quarter of 2009, which ended on 27 December 2008.

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